Gulf Stream

This is an archived version of the PW Sources newsletter from Saturday, July 1. Sign up to receive PW Sources directly to your inbox here.


Sovereign credit ratings—typically issued by Moody’s, Fitch, and Standard and Poor’s—strongly determine the volume of credit extended to a government and on what terms.

In a 2017 article, ZSÓSFIA BARTA and ALISON JOHNSTON examine how credit rating agencies discriminate against left governments.

From the text:

“In our quantitative analysis, we test for the presence of partisan bias in the ratings of each of the big three credit rating agencies (CRA) over as well as the market’s pricing of sovereign risk to gauge the extent to which different market actors employ partisan discrimination. We find that CRAs discriminate against the left, but markets do so only insofar as they incorporate partisan-biased credit ratings into their decisions. We employ a linear probability model (LPM) panel analysis of negative ratings decisions by S&P, Moody’s, and Fitch for 23 Organisation for Economic Co-Operation and Development (OECD) economies from 1995 to 2014, and then compare these results with an identical (ordinary least squares [OLS]) panel analysis of spreads on long-term government bonds (a proxy of market attitudes toward sovereign creditworthiness) for the same sample. We find that, ceteris paribus, downgrades were more likely from S&P and Moody’s under left-controlled executives (i.e., executives headed by left prime ministers). Fitch does not display similar biases against left prime ministers in their (negative) ratings decisions, but they do exhibit partisan bias in downgrades against executives with strongly left-oriented manifestos and cabinets with high shares of seats occupied by left parties (i.e., single-party left administrations). In addition, the probability of negative rating changes is even higher for S&P and Moody’s upon the election of nonincumbent left governments.” 

+ “Credit ratings are systematically and significantly negatively correlated with entitlements.” From a 2020 paper by Barta and Johnston. Link. And see Barta’s 2022 PW essay on the “Big Three” ratings agencies and financialization. Link

+  “If the G20 countries are serious about improving developing countries’ debt positions during the COVID-19 crisis, they should begin by supporting the temporary suspension of credit ratings.” By Jayati Ghosh. Link

+  “Africa has witnessed an avalanche of premature downgrades, usually more than what would be justified by the countries’ economic fundamentals.” From the 2022 “Africa Sovereign Credit Rating Review,” by Misheck Mutize. Link. And Mutize on the need for an African credit rating agency. Link


Wind and solar energy

NATALIA D’AGOSTI is a PhD candidate in economics at Rutgers University. In her job market paper, she explores how the growth of wind and solar energy effects affects the electricity supply market. 

From the abstract

“Using hourly production data from Uruguay, a country which currently has 94% of its grid green, I study its electricity transition to renewables. In particular, I quantify how an increase in wind and solar production first, displaces thermal, hydro, and biomass production. Second, I analyze how this transition reduces CO2 emissions in a context of large hydro production; and third how it affects spot prices. I find that the increase in wind and solar production has several positive effects, (i) a displacement of thermal production, especially in winter; (ii) a reduction in the CO2 emissions; (iii) a spillover effect to the region due to an increase in exports to Argentina and Brazil; (iv) a decrease in spot prices caused by the shutting-off of the most (marginally) costly plants. However, the increase in wind and solar production is not enough to eradicate thermal entirely. These results show what countries can expect from increasing their production in renewables, how renewables interact with other electricity sources, and its effect on emissions, and spot prices.”

+ + +

+  “Over the past fifteen years, China’s parallel circuit of sovereign lending has emerged to sit uneasily alongside and largely disconnected from this regime.” New on PW, Nicholas Jepson examines Chinese and IMF-centered systems of lending. Link.

+  “With no hard requirements to prioritize green investment, what will European countries do?” New on The Polycrisis newsletter, Kate Mackenzie and Tim Sahay on the prospects of a European green transition. Link

+  Three on affirmative action: Danny Yagan on how affirmative action bans might reduce African American students’ applications to universities. Link. Rodrigo Zeidan, Silvio Luiz de Almeida, Inácio Bó, and Neil Lewis on affirmative action and Brazilian labor markets. Link. And Surendrakumar Bagde, Dennis Epple, and Lowell Taylor on how affirmative action at Indian engineering colleges increases attendance of female and disadvantaged caste students. Link

+  Aditya Bahl on Indian capitalism and the Congress party. Link

+  “China’s shadow reserves are big. Bigger than the formal reserves of the world’s second largest holder of reserves (Japan).” Brad Setser on China’s “shadow reserves.” Link

+  “By contributing to significant changes in corporate strategies and governance through potential effects on jobs and wages, institutional investors in most OECD countries may have weakened the influence of trade unions.” By Yasmine Mohamed and Thibault Darcillon. Link

+  Janet Muchai on Ghana’s public debt crisis. Link

+  Yang He, Yun Ma, Meng Tang, and Lu Wang on local government debt and firm “zombification” in China. Link

+  “The inter-regional competition between the US and the EU will also need to grapple with the current dominance of East Asia (Japan, Korea, and in particular China), in the production of components and related intermediates needed for the manufacture of EVs.”By Benjamin Jones, Viet Nguyen-Tien, Robert Elliott, and Gavin Harper. Link.

+  “Despite the fact that the exact circumstances under which the mafia arose are not completely clear, we know that they thrived from offering protection to lemon and orange producers, from manipulating market prices, and from acting as intermediaries between producers and exporters. The protection services easily slipped into extortion where producers faced a direct threat of violence from the mafia if they refused to pay protection money. Why would the mafia focus on citrus production and not, for example, on the cultivation of wheat or wine? First, the market value and profitability of citrus fruits was unusually high at the time, certainly much higher than for basic food crops like wheat. Second, the large fixed costs associated with irrigation and the long time before trees matured, made producers sensitive to predation. A harvest of lemon fruits is very difficult to protect when the fruits are still on the trees. As a consequence, lemon groves were more vulnerable to predation, despite the frequent construction of walls and the use of dogs and guards.” By Arcangelo Dimico, Alessia Isopi, and Ola Olsson. Link

Each week we highlight research from a graduate student, postdoc, or early-career professor. Send us recommendations:

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